Best Buy: Is E-Commerce Its Savior?

Best Buy (NYSE:BBY) held its annual meeting June 20. The message it sent was crystal clear: its stores are a big part of its future, especially when it comes to e-commerce. Can online sales save the company? I think so; here's why.

Business Priorities
Right there on Page 28 of Herbert Joly's management presentation are Best Buy's six priorities for fiscal 2014. Heading the list is its desire to accelerate online line growth. Dovetailing nicely is priority number two, which is to escalate the multi-channel customer experience. It's hard to believe but Best Buy doesn't currently offer a ship-from-store service enabling customers to order product online that's available in its store inventory as opposed to its centralized warehouses.

While you can order products online to be picked up at a store, you can't order products available at the stores to be delivered to your home. This gap in its inventory management causes it to lose between 2% and 4% of customer orders each month because the website shows a product out of stock when in fact one or more stores has inventory on the sales floor or out back in the store room. Chief Financial Officer Sharon McCollam sees this fix in the system adding significantly to its online business. As Thomas Lee points out in his June 22 article in the Minneapolis StarTribune, it converts only 1.3% of the 1 billion annual visits to BestBuy.com. When you're scraping the bottom of the barrel it's not hard to see why the former Williams-Sonoma (NYSE:WSM) executive is excited about harnessing the power of its existing 1000-store infrastructure.

2015 and beyond
The benefits of Renew Blue, Herbert Joly's plan to transform Best Buy, won't be truly felt until 2015. However, an immediate positive in the first quarter was its domestic online revenue, which increased by 16.3% to $498 million, 630 basis points higher than the same period a year earlier. Unfortunately, this represents just 5.3% of its $9.3 billion in domestic revenue in Q1. Any retailer worth its salt should be generating at least 10% of its revenue from its e-commerce initiatives. On the upside, if it is able to drive additional revenue from a reformatted e-commerce platform, possibly even hitting the 10% level, this translates to approximately $3.6 billion in annual revenue.

Part of its transformation includes generating greater revenue and gross profits per square foot. By remaking its stores to provide better merchandising along with an optimized selling space, it seeks to reverse the sales slide in recent years. New additions to the average Best Buy include 500 Microsoft (Nasdaq:MSFT) stores-within-a-store, 1,400 Samsung Experience Shops, an Apple (Nasdaq:AAPL) zone, a greater emphasis on tablets, and a specific space dedicated to clearance items. This last point might seem like an insignificant move but the company estimates it sends $400 million to third-party resellers when it could just easily make those products available in-store and online. If the e-commerce platform Sharon McCollam is introducing works like it's supposed to, this is found money for the company.

Better Execution
Herbert Joly has introduced common sense to Best Buy. In response to a question at the annual meeting about price competitiveness, Joly said, "Our strategy to be price competitive is to be price competitive…Just look at the same outside of this building: Best Buy." And that's the thing. A business such as itself with the level of revenue it generates annually should be able to match any retailer online or in the store. Its low price guarantee combined with an aggressive e-commerce model and in-store execution should be more than enough to dig Best Buy out of its whole.

Last August when Joly was announced as CEO, many in the media were puzzled by his hiring. Since then Best Buy's achieved a total return of 131% in approximately 10 months with Joly as CEO. Joly was the right hire and over the next 12-24 months shareholders will see the results of his simple goal to execute better. Experts say that coming up with business ideas is easy; executing on those ideas is much tougher. Joly has righted the ship and although the next few quarters will be tough ones as they transform its business, what appears out the other end will be a much stronger company able to compete online and off.

Is e-commerce its savior? That's hard to say. But it's definitely going to play a big part in its future. And that's a good thing if you're a Best Buy shareholder.